The sale and purchase of goods and services between businesses results in the creation of accounts receivable and accounts payable for the creditor (“seller”) and the debtor (“buyer”), respectively. Traditionally, these accounts are maintained separately by the creditor and debtor, and are settled by payment of the outstanding obligation from debtor to creditor using checks, cash, clearing house transfers or wire transfers.
Usually, any information exchange between two commercial parties, such as the presentment of an invoice or the provision of remittance data, is paper-based, and requires manual processing even when one or both parties use electronic data processing systems. Relevant information, such as invoices and remittance data, is sometimes exchanged between the commercial parties electronically, via EDI (“Electronic Data Interchange”) or other communication means. This requires translation from one party's paper or electronic system to the rigid EDI format, transmission through a privately maintained network, receipt, and translation back to electronic or paper records suitable for the counterparty's system. Because EDI is difficult and expensive to implement, maintain, and use, it has not been widely adopted.
Even when both parties use similar internal systems, such as ERP (“Enterprise Resource Planning”) systems, there is virtually no interoperability between business partners, since such systems are designed for intra-company processing and workflows and not for communication between such systems. Thus, the exchange of information, at best, requires multiple conversions to different types of electronic systems, which may vary across a firm's trading partners. More typically, the exchange of information involves multiple transitions from electronic systems to paper and then back to electronic systems. If one of the trading partners does not agree to an element of an invoice (e.g., because goods arrived damaged), the process of resolving the matter can involve multiple interactions through mail, fax, and phone. Therefore, a system that creates an electronic linkage between trading partners for management of information, exchange of information, and resolution of disputes is desired. Such a system will alleviate the burden to businesses of limited interoperability and paper processing, reduce the cost of processing, and improve the efficiency of trade.
Businesses typically apply various internal rules in all their business processes, including the processing of accounts receivable and accounts payable. Such rules are intended to provide appropriate oversight and control over financial transactions. For example, only certain persons may be permitted to approve invoice amounts, a manager who has ordered the goods and services may be required to verify that the bill is in order before it is paid, and an officer may be required to authorize payments in excess of a certain amount. These rules are referred to as “workflow rules” (i.e., they determine how work flows through an organization). These workflow rules often require paper or electronic documents to be transmitted around an organization for approval, and it is not uncommon for documents to be delayed or lost in the process. An electronic system to handle accounts receivable and accounts payable must permit businesses to exercise a similar level of control. Thus, a system that makes documents accessible to any authorized users without physical transfers; incorporates role-based workflow management to allow businesses to increase the efficiency of processing accounts receivable and accounts payable; increases efficiency while maintaining financial and managerial control; and allows the automation of activities and approvals based on user-defined criteria, is desired.
Systems and methods currently available for facilitating settlement of transactions are also beset with many limitations. While small debts may be settled in cash, the actual settlement of payments for goods and services is usually conducted by the banking system using instruments such as checks, clearing house (ACH) or wire transfers. These instruments can be quite costly, particularly for international payments. In addition, these instruments result in an exchange of cash or bank balances between the commercial parties that is separate from the exchange of information relevant to the transaction (e.g., remittance information). This is because only limited information can be transmitted through the US and global banking systems' clearing processes. As a result, creditors prefer to receive a separate payment for each obligation. When debtors group payments (e.g., issue one check for several invoices) or net any deductions or credits from payments due, creditors have difficulty reconciling the payment and closing the accounts receivable due to the limited information available through the bank settlement systems. Thus, an information-rich settlement system that allows participants to achieve network economies and reduce payment costs through aggregating and netting payments, while providing access to detailed information required to track and reconcile such payments, is desired.
Because the current practices of accounts receivable and accounts payable management are undertaken by each party in isolation, potentially valuable information remains hidden until final settlement. For example, a debtor's intention to pay an amount due with respect to a particular invoice is not evident to the creditor until a check is received, deposited and cleared. Furthermore, disputes that may arise with respect to an invoice or other claim may not be apparent to the creditor until a payment is received showing that a debtor took a deduction (i.e., remitted an amount less than the invoiced amount).
In addition to raising the cost of processing accounts receivable and accounts payable, the deficiencies in information management result in higher costs of financing and force businesses to maintain working capital balances in excess of what would be required if information on accounts receivable and accounts payable were more clear and readily available. The lack of information transparency contributes to the mispricing of credit, particularly for SMEs (“small- and mid-sized enterprises”), which routinely pay interest rates higher than their larger counterparties. It also leaves businesses with a limited set of options for financing receivables.
Most receivables are financed by creditors using working capital, often supported by general commercial and industrial loans at rates reflecting the largely unsecured status of such loans. Some companies are able to access capital markets for receivables financing through complicated conduit structures, while others may turn to factoring. Both these and other solutions currently available typically apply relatively high interest rates as well as a marked-down loan amount relative to the face value of the receivables. The high interest rates and low loan-to-value ratios are meant to compensate for dilution (adjustments to receivables after they are booked) risk, default risk, liquidity risk, and other risks. Improved information on accounts receivable would reduce these risks, and consequently the cost of funds.
Thus, a system that addresses the deficiencies of information management inherent in current processes to provide for more accurate risk assessment by lenders is desired. Through such a system, the exact profile of cash flows for accounts receivable and accounts payable can be captured, as well as information on the creditworthiness of specific debtors; this information can be made available to lenders for their risk assessment processes. By providing means for debtors and creditors to confirm the amounts to be paid (net of any adjustments) and the date on which payment will be made, such a system would facilitate a wide range of commercial arrangements for financing accounts receivable and accounts payable, including a new class of tradable electronic promissory notes.
In summary, a system that provides more efficient interaction between debtors and creditors and provides improved information flows is desired. Such a system would improve overall system efficiency by significantly reducing the costs of invoicing, reconciling accounts receivable and accounts payable, and settlement. The improved information gathering and transparency features would also reduce the cost of financing.